BUSINESS

Kinross Gold shares down nearly 20 per cent amid troubles at Tasiast mine

01/17/2012 12:05 EST | Updated 03/18/2012 05:12 EDT
Shares in Kinross Gold Corp. (TSX:K) were down nearly 20 per cent Tuesday morning after the gold miner said construction of its Tasiast mine in Africa will be delayed by months and a writedown on the project was expected.

Kinross said feasibility studies at its Fruta del Norte project in Ecuador and Lobo-Marte project in Chile would also be extended in order to optimize capital costs and project sequencing.

"What we're trying to do is optimize and make the capital that we spend most efficient," Kinross chief executive Tye Burt told a conference call with financial analysts.

Kinross shares fell $2.55 to trade for $10.65 on the Toronto Stock Exchange.

At Tasiast, Kinross said late Monday it would take an additional six to nine months of analysis and planning to determine the optimal processing mix to reduce operating costs.

Kinross acquired the project in 2010 with its $7.1-billion acquisition of Red Back Mining.

The company said it's still working to determine the extent of a writedown that will be required, but noted more half of the $7.1-billion book value of Tasiast, roughly $4.6 billion, was considered goodwill at the end of the 2011 third quarter.

Goodwill is an intangible asset that reflects the long-term value of an acquired business. If the estimated value is eroded by changed circumstances, a company is required to take a charge.

BMO Capital Markets analyst David Haughton rated Kinross an "outperform" with a US$20 price target, but noted that the news was negative for the stock.

"BMO Research expects the Tasiast feasibility study delay and asset writedown to be viewed negatively by the market, as it suggests uncertainty in management's ability to deliver the project," Haughton wrote in a note to clients.

The company also outlined Monday its preliminary capital spending plans for 2012 as well as guidance on its expected output of gold and silver this year.

Kinross, which has operations in several countries around the world, said it expects US$2.5 billion in capital spending in 2012 — more than half of it for growth projects, primarily Tasiast.

The company, which reports in U.S. currency, has budgeted nearly $1.2 billion for existing operations and $1.3 billion for growth projects.

Kinross (TSX:K) says its 2012 output will be the equivalent of up to 2.8 million ounces of gold, which would be eight per cent above last year's production, according to figures released Monday by the Toronto-based company.

Preliminary estimates indicate Kinross produced the equivalent of 2.6 million ounces of gold in 2011 — within the company's previous guidance range, the company said.

This year, Kinross estimates it will produce between 2.6 million and 2.8 million gold-equivalent ounces from its current operations, but at a higher cost. The 2012 production estimate includes between 7.5 million to 8.0 million ounces of silver and between 2.5 million and 2.6 million ounces of gold.

Kinross estimates its 2012 production cost will be in a range of US$670 to $715 an ounce, up from an estimated $600 per gold-equivalent ounce in 2011.

Note to readers: This is a corrected story. A previous version stated the value of the Red Back Mining deal in 2010 at $7.1 million.